China Manufacturing Slumps Amid Soft Demand and Rising Input Costs
China's manufacturing sector has hit the brakes, contracting for the first time in five months. The official manufacturing PMI dropped to 49.2 in July from 50.3 in June, with new orders plummeting to 48.5, their weakest reading since 2023.
The contraction is broad-based and not just a quirk of government methodology, as the private S&P Global/Caixin manufacturing PMI also dropped to 49.5 from 50.4 in June. Export orders slipped to 49.6 from 50.1 the prior month, production edged below the expansion line at 49.9, and employment remained weak at 49.0.
The non-manufacturing PMI also fell into contraction territory at 49.0, indicating that the weakness is not confined to factories alone. The slowdown reflects a cocktail of headwinds, including soft domestic demand, unwinding front-loading activity related to anticipated tariffs, and geopolitical tensions in the Middle East pushing input costs higher.
The yuan's trajectory also matters, as a weaker yuan has historically correlated with increased capital flight into alternative stores of value like Bitcoin. The new orders sub-index at 48.5 is a forward-looking indicator, suggesting that production schedules for August and September may also be weak.